Private equity group Terra Firma is looking to bring in outside investors to help prop up music company EMI, which is creaking under £2.6bn of debt.

City pension funds, insurance companies and foreign banks have been approached amid fears within Terra Firma that EMI could default on interest repayments to Citigroup, which bankrolled the £4bn buyout of the music group on the eve of the credit crunch in 2007.

But Terra Firma would retain majority control in the event of any restructuring, and its boss, financier Guy Hands, would remain chairman at the company, whose roster of artists include the Beatles, Robbie Williams and Norah Jones.

EMI is profitable at the operating level but has been hit hard by borrowing costs that have forced Terra Firma to twice inject equity into the operation in the past 18 months.

EMI can meet its debt-servicing liabilities, but there are worries that if its recorded music division loses momentum, it could struggle to fulfil its obligations. In the event that EMI defaulted on its debt, Citigroup could be forced to take over the business and the US investment bank would find itself in the unusual position of owning one of the world's largest music firms.

Hands's latest attempt to recapitalise EMI would involve Terra Firma and new investors injecting £1bn of equity. But the plans could be contingent on him being able to persuade Citigroup to write off £1bn of debt. So far the two sides have been unable to reach an agreement, although one solution would see Citigroup swap debt for equity as part of a broader refinancing deal.

Terra Firma's borrowing terms mean that debt must stay within a certain multiple of earnings, a covenant tested every six months. If it does not, it can inject equity, but Hands may be unwilling or unable to do so indefinitely. So far, he has written down the value of his investment in EMI, which now stands at £2.3bn including equity injections, by 90%.

The EMI buyout has been a disaster for Terra Firma. The closure of debt markets in the wake of the credit crisis two years ago prevented Citigroup from syndicating the loan by issuing bonds secured against EMI's future cash flows, particularly from its very stable music publishing arm. Easier refinancing terms have been impossible to secure.

Efforts to cut costs at EMI have been met with a barrage of complaints from music acts, many of them alleging that Hands does not understand the business. Among those to have quit the label are Radiohead and the Rolling Stones.

Hands has made swingeing cost cuts and axed 2,000 jobs in a bid to boost profitability. But he admitted recently that buying EMI was one of his biggest mistakes and that if the auction had started just two weeks later – as the credit crisis began to unfold – he would not have gone ahead.

One exit for Hands is the long-mooted sale of EMI to Warner Music, though this risks running into opposition from the competition authorities.

Pirates sink recording sales

Rampant piracy, falling prices, confusion over where and how to buy music and a consumer downturn – it is a torrid time in the record business.

Even allowing for a surge in revenues from downloads and streaming, global music sales were down 8.3% in 2008, the latest full-year figures available from industry group IFPI.

Industry executives and politicians hope clampdowns on illegal file-sharers – such as those proposed in the UK by Lord Mandelson – will help drive music fans from pirate sites to legitimate services such as Spotify. Meanwhile, piracy remains rife. The IFPI's latest estimate is that 95% of music downloads are unauthorised, with no payment to artists and producers.

Critics argue that music companies need to work harder at getting cheap, easy-to-use alternatives to pirates up and running. Reports that Virgin Media's promised music service is stalling over the failure of big labels to sign up have further angered those that argue an anti-piracy drive must be a mixture of carrot and stick.

EMI says it has grown recordings sales 4.6% in the year to 31 March to just shy of £1.1bn and hopes for a Christmas lift from remastered Beatles albums and new releases from Norah Jones, Robbie Williams and Snoop Dogg. But it continues to struggle in the US, where according to Soundscan its market share has slipped to 8.74% over the year.